High prices begin to affect the world's appetite for oil
Carola Hoyos | Sunday, 15 June 2008
As truckers protest against high fuel prices, politicians seek seapegoats among speculators and governments in Asia abandon expensive fuel subsidies, evidence is beginning to mount of a dramatic shift in oil demand.
America, for one, shows signs of finally starting to address its addiction to oil. Early this month General Motors, the biggest US carmaker, said it was considering ditching the division that makes its Hummer. That the most super-sized of all off-road vehicles is losing its appeal - in the year that the Smart, the key-ring-sized Swiss car made for two, landed in US showrooms after years of zipping around the narrow streets of Europe's capitals - has been duly noted by economists tracking oil demand at the International Energy Agency (IEA) in Paris.
Eduardo Lopez, an analyst at the developed countries' energy watchdog, sees evidence of a structural shift slowly improving the efficiency of the US car fleet. "People can ignore higher prices as long as they are getting richer, but suddenly the tide has turned. The average American has to deal with high oil prices and income problems [one in 10 homeowners is struggling to keep up with mortgage payments, according to the Mortgage Bankers' Association] and in many cases he is stuck driving a monstrosity that costs him half his monthly wage just to take him around the corner," he says.
The IEA and other forecasters have been collecting such anecdotal evidence of demand erosion, along with the usual numbers on economic growth, inflation and miles driven (which in the US dropped this March for the first time since 1979) for some time.
Now those trends are showing up in their demand forecasts. Last month, the US Department of Energy slashed predictions for US demand, saying it would fall more than twice as much as previously believed. Taking into account the US's projected switch to ethanol, US oil demand this year is expected to shrink by 330,000 barrels a day. In 2007, Americans used 20.7m b/d, one quarter of demand worldwide.
Others argue that there is a significant speculative element at work. George Soros, the billionaire investor, told a congressional committee early this month that investments in the futures market were exaggerating price rises and creating a market bubble in oil and other commodities.
The question now is whether the price of oil will eventually fall from its current high level as the world's biggest consumer opts for fewer trips, smaller cars and ethanol; or whether supply concerns will continue to dominate while China and the Middle East cancel out declines in demand in the US and other developed countries.
This year's entire world oil demand growth, estimated at about 1.0 m b/d, is expected to occur in countries that have used subsidies to shield their citizens from the recent rise in oil prices. Half the world's population benefits from subsidised fuel, though the distortion becomes less dramatic if one takes into account that the fuel they purchase at cut-rate prices represents only one quarter of the world's total. Around the world, drivers pay wildly different sums for petrol and other fuels. Stations in the US - often used as the benchmark because their prices are neither heavily taxed nor subsidised - charge $1.0 a litre; those in China demand 64c, those in Saudi Arabia 12c and those in Venezuela 5.0c.
But for some governments, the economic burden of suppressing fuel costs, and thereby also inflation, is becoming too much to shoulder. Faced with ballooning budgets and failing state refiners, India, Indonesia, Malaysia and Taiwan have recently begun to reduce their subsidies despite threats of political backlash and, in some cases, violent street protest. Their decisions should in theory act as a drag on demand as customers recoil at the new higher prices at petrol pumps and elsewhere.
This is important in both the short and the long run, especially in emerging economies currently deciding whether to build roads or railway tracks and efficient public bus services as their citizens move from the countryside to urban centres.
"If you look at American cities, they were designed for the private car in the 40s, 50s and 60s. Sending a strong signal, by scrapping subsidies and taxing fuel, to emerging economies that energy is a scarce resource would be very important," says Armin Wagner, a desk officer at the GTZ, the German government's development agency and one of the authors of an annual study of international fuel prices in more than 170 countries.
But even with some Asian countries cutting subsidies, US demand contracting, Europe about flat, and the world's poorest countries struggling to pay their fuel import bills, a slowdown in world demand growth and the subsequent fall in prices may well be kept in check by the economic boom in China and the Middle East.
China - whose oil demand is expected to grow 5.0-10 per cent - fuelled in part by the country's preparations to host this summer's Olympic Games - caps its price of fuel. For more than a year, the government has refused to raise the mandatory price ceiling, thereby imposing big losses on its state refiners and forcing smaller so-called tea-pot refiners out of business as oil prices have risen. This has lead to fuel shortages. Nevertheless, few analysts expect Beijing to cut subsidies before it has a handle on inflation. Even if China moves to reduce the waste and shortages caused by unreasonably low prices, oil demand in the short term may rise - exactly the opposite of what is expected.
"Pent up demand in China is significant. What you see there is not a middle class that would find itself destitute if fuel prices increased," Mr Lopez said. In fact, raising the prices in China could prompt crude imports to increase as big refiners boost their processing runs and smaller ones resume operations to supply the country's rural regions with gasoil.
Meanwhile, China is not the only country resisting calls by the International Monetary Fund, the Asian Development Bank and the IEA to cut subsidies. The biggest culprits of waste are oil exporters. As large inflows of petro
America, for one, shows signs of finally starting to address its addiction to oil. Early this month General Motors, the biggest US carmaker, said it was considering ditching the division that makes its Hummer. That the most super-sized of all off-road vehicles is losing its appeal - in the year that the Smart, the key-ring-sized Swiss car made for two, landed in US showrooms after years of zipping around the narrow streets of Europe's capitals - has been duly noted by economists tracking oil demand at the International Energy Agency (IEA) in Paris.
Eduardo Lopez, an analyst at the developed countries' energy watchdog, sees evidence of a structural shift slowly improving the efficiency of the US car fleet. "People can ignore higher prices as long as they are getting richer, but suddenly the tide has turned. The average American has to deal with high oil prices and income problems [one in 10 homeowners is struggling to keep up with mortgage payments, according to the Mortgage Bankers' Association] and in many cases he is stuck driving a monstrosity that costs him half his monthly wage just to take him around the corner," he says.
The IEA and other forecasters have been collecting such anecdotal evidence of demand erosion, along with the usual numbers on economic growth, inflation and miles driven (which in the US dropped this March for the first time since 1979) for some time.
Now those trends are showing up in their demand forecasts. Last month, the US Department of Energy slashed predictions for US demand, saying it would fall more than twice as much as previously believed. Taking into account the US's projected switch to ethanol, US oil demand this year is expected to shrink by 330,000 barrels a day. In 2007, Americans used 20.7m b/d, one quarter of demand worldwide.
Others argue that there is a significant speculative element at work. George Soros, the billionaire investor, told a congressional committee early this month that investments in the futures market were exaggerating price rises and creating a market bubble in oil and other commodities.
The question now is whether the price of oil will eventually fall from its current high level as the world's biggest consumer opts for fewer trips, smaller cars and ethanol; or whether supply concerns will continue to dominate while China and the Middle East cancel out declines in demand in the US and other developed countries.
This year's entire world oil demand growth, estimated at about 1.0 m b/d, is expected to occur in countries that have used subsidies to shield their citizens from the recent rise in oil prices. Half the world's population benefits from subsidised fuel, though the distortion becomes less dramatic if one takes into account that the fuel they purchase at cut-rate prices represents only one quarter of the world's total. Around the world, drivers pay wildly different sums for petrol and other fuels. Stations in the US - often used as the benchmark because their prices are neither heavily taxed nor subsidised - charge $1.0 a litre; those in China demand 64c, those in Saudi Arabia 12c and those in Venezuela 5.0c.
But for some governments, the economic burden of suppressing fuel costs, and thereby also inflation, is becoming too much to shoulder. Faced with ballooning budgets and failing state refiners, India, Indonesia, Malaysia and Taiwan have recently begun to reduce their subsidies despite threats of political backlash and, in some cases, violent street protest. Their decisions should in theory act as a drag on demand as customers recoil at the new higher prices at petrol pumps and elsewhere.
This is important in both the short and the long run, especially in emerging economies currently deciding whether to build roads or railway tracks and efficient public bus services as their citizens move from the countryside to urban centres.
"If you look at American cities, they were designed for the private car in the 40s, 50s and 60s. Sending a strong signal, by scrapping subsidies and taxing fuel, to emerging economies that energy is a scarce resource would be very important," says Armin Wagner, a desk officer at the GTZ, the German government's development agency and one of the authors of an annual study of international fuel prices in more than 170 countries.
But even with some Asian countries cutting subsidies, US demand contracting, Europe about flat, and the world's poorest countries struggling to pay their fuel import bills, a slowdown in world demand growth and the subsequent fall in prices may well be kept in check by the economic boom in China and the Middle East.
China - whose oil demand is expected to grow 5.0-10 per cent - fuelled in part by the country's preparations to host this summer's Olympic Games - caps its price of fuel. For more than a year, the government has refused to raise the mandatory price ceiling, thereby imposing big losses on its state refiners and forcing smaller so-called tea-pot refiners out of business as oil prices have risen. This has lead to fuel shortages. Nevertheless, few analysts expect Beijing to cut subsidies before it has a handle on inflation. Even if China moves to reduce the waste and shortages caused by unreasonably low prices, oil demand in the short term may rise - exactly the opposite of what is expected.
"Pent up demand in China is significant. What you see there is not a middle class that would find itself destitute if fuel prices increased," Mr Lopez said. In fact, raising the prices in China could prompt crude imports to increase as big refiners boost their processing runs and smaller ones resume operations to supply the country's rural regions with gasoil.
Meanwhile, China is not the only country resisting calls by the International Monetary Fund, the Asian Development Bank and the IEA to cut subsidies. The biggest culprits of waste are oil exporters. As large inflows of petro